Commerce Tips

Preventing Referral Fraud in Loyalty Programs

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Editor’s Note: this post was originally published July 13, 2016 and was updated for accuracy and comprehensiveness on Feb 21, 2019.

Successfully growing your brand community means that customers join it and engage with your brand, but closing the community building loop requires them to share your community with others.

Referral programs are an easy way to encourage your customers to do just that, giving them the opportunity to earn rewards while bringing new members into your brand community.

Referral Fraud: attempts to exploit your referral program to gain rewards that haven’t been earned.

Unfortunately there are always going to be some not-so-genuine customers who only join your community in a search for ways to exploit your program’s benefits. These malicious attempts to abuse your referral rewards are commonly referred to as “referral fraud”.  

Preventing referral fraud

With so many ways customers can attempt referral fraud, like creating fake accounts or sharing referral codes on discount sites, it’s clear that fraud is a common concern. However, as much as I’d like to be able to guarantee otherwise, preventing referral fraud in its entirety is not a realistic possibility.

Completely preventing referral fraud is not a realistic possibility.

Understandably, that is not the kind of answer anybody wants to hear.  However, in order to completely prevent referral fraud, you would have to place restrictions on your loyalty program that would limit its functionality and make it more of a burden than a benefit for your program members.

99% of your customers will participate in a referral program properly, with only 1% attempting fraud.

The reality is that the overwhelming majority of your members, would never consider referral fraud, only 1% would ever try  to cheat the system.

For the few who have less than honorable intentions, the best way to handle referral fraud is to put an emphasis on prevention. From our own experience we know there are a number of things you can do in both the structure and maintenance of your referral program that can help stop referral fraud in its tracks.   

1. Reasonable incentives

If I was looking to rip off a referral program (which I’m not, rest assured), I’d be looking for a program offering an unbelievable reward for referring my friends. After all, beating the system is hard work – I’d want to make sure it’s worth my while! With this in mind, a program that promises $50 worth of products for one referral is going to be more appealing than a program that only offers $5 off.

Rewards should motivate customers to make a referral without breaking the bank.

The trick with rewarding for referrals is to offer your customers something that motivates them to share but won’t break the bank if it’s taken advantage of. Take a look at your cost-of-goods and profit margins, and set your advocate rewards at a level that provides value to your loyal customers, but won’t look like a cash grab to scammers.  

2. Offer points, not dollars

Creativity is a key ingredient in preventing referral fraud. Instead of offering direct dollar discounts to referral advocates, why not offer them points that can be redeemed for brand-specific rewards?

Point rewards provide immediate value for customers who are already in your program.

This type of reward discourages swindlers from creating and cancelling an account in an effort to cash in, but still provides immediate value for loyal community members who are already participating in your rewards program.

Fraud Prevention Gaiam referral Using points as the incentive instead of dollars can even be more valuable to program members, since they can use those points towards a reward they’ve been working towards. Not only that, but unlike cash discounts, points can contribute to their progress to the next VIP tier, multiplying the value of whatever points they earn.


3. Reward purchases instead of invites

Some referral programs hand out rewards for simply referring a friend to the store, while others only reward an advocate once their friend has made a purchase. If you’re looking to minimize referral fraud, the second of these two is the best solution.

Fraud Prevention Mpix referral With Smile, you’re able to reward the Advocate only once the Friend has made a purchase. Not only that, but you’re also able to provide the friend with a discount off their first purchase, providing an exceptional customer experience right out of the gate. This idea of reciprocity also increases the likelihood that friends will follow through with making a purchase, having been given something of value,  which helps your brand community continue to grow.

Rewarding purchases instead of invites encourages community growth while minimizing fraud.

This method of rewarding actions with value helps limit the amount of referral trolls coming through your store – chances are, they won’t want to do any work in order to get what they’re after. The best part about this solution? You’re given the opportunity to dazzle a new customer!

4. Add a minimum purchase amount for reward redemption

One of the most common ways a customer will try to "outwit" your referral program is by using a defrauded coupon to pay for their whole order.

The easiest way to prevent this type of fraud is simply to put in place a minimum purchase amount. This will force customers to add more products than the value of their coupon to their cart, mitigating lost revenue so that a coupon can't be applied to their whole order. With this prevention in place, customers will be discouraged from making empty referrals in an effort to get their order for free.

5. Spot checks

One of the best ways to work towards preventing referral fraud is to stay proactive. Loyalty apps like Smile.io let you  monitor member behavior within your rewards program. This allows you to better understand your program’s success while also keeping you aware of suspicious activity.

Monitoring customer behavior and noticing irregularities is key to preventing referral fraud.

You may be thinking “I don’t know what suspicious activity looks like!”

A general rule of thumb is to look for patterns. If an advocate suddenly makes a large number of referrals, or if you notice that the friends completing referrals have email addresses very similar to the advocate who sent it to them, that might be a red flag. Additionally, advocates who are consistently referring friends who make small purchases, or if referred friends pay only for shipping costs are a couple common examples of behaviour to keep an eye on.

This might sound like a lot of manual work, but thankfully there are some automated tools that can help reduce the amount of time you have to spend reviewing individual referral activities.  Smile’s fraud analysis helps you minimize your program’s exposure to referral abuse by automatically detecting and blocking referrals that are likely to be fraudulent, like when a friend’s order isn’t their first one, or when an order is placed by the referral advocate.

Understanding what to look for equips you with the knowledge you need to stay on top of your referral program and  prevent fraud moving forward.

Prevention is better than a cure

In an ideal world, referral fraud doesn’t exist.  Since it unfortunately does exist, the important thing is to design a program tailored to the needs of the people who want to use it properly. With the right program in place, your referral program becomes a pivotal part of the community building cycle.

In fact, referrals close the community building loop as they make it easier for your delighted customers to share their love of your brand with friends who can become customers as well. Those friends can then become dedicated members of your community and be motivated to share as well, and the cycle continues.  

The benefits from the majority of your customers outweigh the negatives from the minority.

With 99% of your customers on your side, you can’t go wrong. After all, the community building benefit from the majority is greater than the negative impact of the very small minority.

Build your community with an effective referral program. 
Learn how to offer referrals that are valuable to you and your members.

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